----

----

| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|--------------------------------------------------------------------------------------|

| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|------------------------------------------------------------------------------------------|

| INTEGRITY APPLICATIONS, INC.                                 |
|--------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)       |
|                                                         |
| Delaware                                                     |   | 98-0668934 |
| (State or other jurisdiction ofincorporation or organization |   | (I.R.S. EmployerIdentification No.) |

| 102 Ha’Avoda StreetP.O. Box 432Ashkelon, Israel                       |   |   L3 78100 |
|-----------------------------------------------------------------------------|--------|----------------------|
| (Address of principal executive offices)                                    |   | (Zip Code)           |
|                                                                        |
| Registrant’s telephone number, including area code 972 (8) 675-7878   |
|                                                                        |
| Securities registered pursuant to Section 12(b) of the Act:  None |
|                                                                        |
| Securities registered pursuant to Section 12(g) of the Act:  None |

----

| Large accelerated filer o                                                  | Accelerated filer o         |
|----------------------------------------------------------------------------|-----------------------------|
|                                                                       |                        |
| Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller Reporting Company x |

----

----

----

|                                                    | Page              |
|---------------------------------------------------------|-------------------|
| Report of Independent Registered Public Accounting Firm | F-3               |
| Consolidated Financial Statements                       |              |
| Balance Sheets                                          | F-4               |
| Statements of Operations                                | F-5               |
| Statements of Changes in Stockholders’ Equity     | F-6 – F-10  |
| Statements of Cash Flows                                | F - 11            |
| Notes to Consolidated Financial Statements              | F-12 – F-33 |

----

| Report of Independent Registered Public Accounting FirmTo the Stockholders of INTEGRITY APPLICATIONS, INC.(A Development Stage Company) | Fahn Kanne & Co.Head OfficeLevinstein Tower23 Menachem Begin RoadTel-Aviv 66184, ISRAELP.O.B. 36172, 61361 T +972 3 7106666F +972 3 7106660www.gtfk.co.il |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

INTEGRITY 

|                                                                                                                                                                                 |   | US dollars (except share data) |        |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|-------------|
|                                                                                                                                                                                 |   | December 31,                   |        |
|                                                                                                                                                                                 |   | 2011                           |        |   | 2010 |   |
| A S S E T S                                                                                                                                                                          |   |                           |        |   |   |   |
| Current Assets                                                                                                                                                                       |   |                           |        |   |   |   |
| Cash and cash equivalents                                                                                                                                                            |   |                           | 1,896,504   |   |   |   | 1,494,248 |   |
| Other current assets (Note 3)                                                                                                                                                        |   |                           | 92,817      |   |   |   | 85,704 |   |
| Total current assets                                                                                                                                                                 |   |                           | 1,989,321   |   |   |   | 1,579,952 |   |
|                                                                                                                                                                                 |   |                           |        |   |   |   |   |   |
| Property and Equipment, Net (Note 4)                                                                                                                                                 |   |                           | 82,868      |   |   |   | 57,350 |   |
|                                                                                                                                                                                 |   |                           |        |   |   |   |   |   |
| Funds in Respect of Employee Rights Upon Retirement                                                                                                                                  |   |                           | 110,310     |   |   |   | 133,335 |   |
| Total assets                                                                                                                                                                         |   |                           | 2,182,499   |   |   |   | 1,770,637 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                           |   |                           |        |   |   |   |   |   |
| Current Liabilities                                                                                                                                                                  |   |                           |        |   |   |   |   |   |
| Credit from banking institutions                                                                                                                                                     |   |                           | -           |   |   |   | 18,843 |   |
| Accounts payable (Note 5)                                                                                                                                                            |   |                           | 71,763      |   |   |   | 10,666 |   |
| Other current liabilities (Note 6)                                                                                                                                                   |   |                           | 211,278     |   |   |   | 258,586 |   |
| Total current liabilities                                                                                                                                                            |   |                           | 283,041     |   |   |   | 288,095 |   |
|                                                                                                                                                                                 |   |                           |        |   |   |   |   |   |
| Long-Term Loans from Stockholders (Note 8)                                                                                                                                           |   |                           | 606,144     |   |   |   | 625,881 |   |
|                                                                                                                                                                                 |   |                           |        |   |   |   |   |   |
| Liability for Employee Rights Upon Retirement                                                                                                                                        |   |                           | 241,176     |   |   |   | 258,522 |   |
|                                                                                                                                                                                 |   |                           |        |   |   |   |   |   |
| Warrants with Down-Round Protection (Note 9C)                                                                                                                                        |   |                           | 83,899      |   |   |   | - |   |
| Total liabilities                                                                                                                                                                    |   |                           | 1,214,260   |   |   |   | 1,172,498 |   |
|                                                                                                                                                                                 |   |                           |        |   |   |   |   |   |
| Commitments and Contingent Liabilities (Note 9)                                                                                                                                      |   |                           |        |   |   |   |   |   |
| Stockholders’ Equity (Note 10)                                                                                                                                                 |   |                           |        |   |   |   |   |   |
| Common Stock of US$ 0.001 par value ("Common Stock"):                                                                                                                           |   |                           |        |   |   |   |   |   |
| 40,000,000 shares authorized as of December 31, 2011 and 2010; issued and outstanding 5,295,543 shares and 4,844,575 shares as of December 31, 2011 and 2010, respectively |   |                           | 5,296       |   |   |   | 4,845 |   |
| Additional paid in capital                                                                                                                                                           |   |                           | 13,457,838  |   |   |   | 10,762,892 |   |
| Accumulated other comprehensive income (loss)                                                                                                                                        |   |                           | 22,634      |   |   |   | (16,418 | ) |
| Deficit accumulated during the development stage                                                                                                                                     |   |                           | (12,517,519 | ) |   |   | (10,153,180 | ) |
| Total stockholders' equity                                                                                                                                                           |   |                           | 968,239     |   |   |   | 598,139 |   |
| Total liabilities and stockholders’ equity                                                                                                                                     |   |                           | 2,182,499   |   |   |   | 1,770,637 |   |

| The accompanying notes are an integral part of the consolidated financial statements. |
|---------------------------------------------------------------------------------------|

----

INTEGRITY 

|                                                                        |   | US dollars (except share data) |      |
|-----------------------------------------------------------------------------|--------|--------------------------------|-----------|
|                                                                        |   | Year ended December 31,        |      |   | Cumulative period from September 30, 2001 (date of inception) through December 31, |   |
|                                                                        |   | 2011                           |      |   |   | 2010(*) |   |   |   | 2009(*) |   |   |   | 2011(*) |   |
|                                                                        |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |
| Research and development expenses, net (Note 11)                            |   |                           | 1,789,301 |   |   |   | 934,056 |   |   |   | 1,005,108 |   |   |   | 8,555,714 |   |
| General and administrative expenses (Note 12)                               |   |                           | 544,145   |   |   |   | 457,495 |   |   |   | 165,156 |   |   |   | 2,161,734 |   |
| Other income                                                                |   |                           | -         |   |   |   | (912 | ) |   |   | - |   |   |   | (912 | ) |
| Operating loss                                                              |   |                           | 2,333,446 |   |   |   | 1,390,639 |   |   |   | 1,170,264 |   |   |   | 10,716,536 |   |
| Financing expenses, net (Note 13)                                           |   |                           | 30,893    |   |   |   | 1,397,807 |   |   |   | 32,032 |   |   |   | 1,800,983 |   |
| Loss for the year                                                           |   |                           | 2,364,339 |   |   |   | 2,788,446 |   |   |   | 1,202,296 |   |   |   | 12,517,519 |   |
|                                                                        |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss per share (Basic and Diluted) (Note 15)                                |   |                           | 0.46      |   |   |   | 0.70 |   |   |   | 0.30 |   |   |   |   |   |
|                                                                        |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average number of shares outstanding (Basic and Diluted) (Note 15) |   |                           | 5,091,330 |   |   |   | 4,034,706 |   |   |   | 3,995,805 |   |   |   |   |   |

| (*) | As described in Note 1A, the financial statements were retroactively restated to reflect the historical financial statements of the subsidiary A.D. Integrity Applications Ltd., which merged with a subsidiary of the Company on July 15, 2010, as part of a structural reorganization of the Group. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| The accompanying notes are an integral part of the consolidated financial statements. |
|---------------------------------------------------------------------------------------|

----

INTEGRITY 

|                                                                                                            |   | US Dollars (except share data) |      |
|-----------------------------------------------------------------------------------------------------------------|--------|--------------------------------|-----------|
|                                                                                                            |   | Common Stock                   |      |   |   |   |   | Accumulated |   |   | Deficit |   |   |   |   |
|                                                                                                            |   | Numberof shares                |      |   | Amount |   |   | Additionalpaid in capital |   |   | other comprehensive loss |   |   | accumulated during development stage |   |   | Total stockholders equity (deficit) |   |
| September 30, 2001 (date of inception)                                                                          |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 2,136,307 Common Stock of US$ 0.001 per share issued for cash                                              |   |                           | 2,136,307 |   |   |   | 2,136 |   |   |   | 38,306 |   |   |   | - |   |   |   | - |   |   |   | 40,442 |   |
|                                                                                                            |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss for the period                                                                                             |   |                           | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (63,293 | ) |   |   | (63,293 | ) |
| Loss on translation of subsidiary's financial statements from its functional currency to the reporting currency |   |                           | -         |   |   |   | - |   |   |   | - |   |   |   | (5 | ) |   |   | - |   |   |   | (5 | ) |
| Comprehensive loss                                                                                              |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (63,298 | ) |
| Balance as of December 31, 2002                                                                                 |   |                           | 2,136,307 |   |   |   | 2,136 |   |   |   | 38,306 |   |   |   | (5 | ) |   |   | (63,293 | ) |   |   | (22,856 | ) |
|                                                                                                            |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss for the year                                                                                               |   |                           | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (350,290 | ) |   |   | (350,290 | ) |
| Loss on translation of subsidiary's financial statements from its functional currency to the reporting currency |   |                           | -         |   |   |   | - |   |   |   | - |   |   |   | (15,035 | ) |   |   | - |   |   |   | (15,035 | ) |
| Comprehensive loss                                                                                              |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (365,325 | ) |
| Balance as of December 31, 2003                                                                                 |   |                           | 2,136,307 |   |   |   | 2,136 |   |   |   | 38,306 |   |   |   | (15,040 | ) |   |   | (413,583 | ) |   |   | (388,181 | ) |
|                                                                                                            |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss for the year                                                                                               |   |                           | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (288,233 | ) |   |   | (288,233 | ) |
| Loss on translation of subsidiary's financial statements from its functional currency to the reporting currency |   |                           | -         |   |   |   | - |   |   |   | - |   |   |   | (15,069 | ) |   |   | - |   |   |   | (15,069 | ) |
| Comprehensive loss                                                                                              |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (303,302 | ) |
|                                                                                                            |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of 42,727 Common Stock for cash at US$ 1.76 per share on March 16, 2004                      |   |                           | 42,727    |   |   |   | 43 |   |   |   | 74,957 |   |   |   | - |   |   |   | - |   |   |   | 75,000 |   |
| Issuance of 72,773 Common Stock for cash of US$ 1.72 per share on November 25, 2004                   |   |                           | 72,773    |   |   |   | 73 |   |   |   | 128,783 |   |   |   | - |   |   |   | - |   |   |   | 128,856 |   |
| Balance as of December 31, 2004                                                                                 |   |                           | 2,251,807 |   |   |   | 2,252 |   |   |   | 242,046 |   |   |   | (30,109 | ) |   |   | (701,816 | ) |   |   | (487,627 | ) |

| (*) | As described in Note 1A, the financial statements were retroactively restated to reflect the historical financial statements of the subsidiary A.D. Integrity Applications Ltd., which merged with a subsidiary of the Company on July 15, 2010, as part of a structural reorganization of the Group. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| The accompanying notes are an integral part of the consolidated financial statements. |
|---------------------------------------------------------------------------------------|

----

|                                                                                                            |   | US Dollars (except share data) |      |
|-----------------------------------------------------------------------------------------------------------------|--------|--------------------------------|-----------|
|                                                                                                            |   | Common Stock                   |      |   |   |   |   | Accumulated |   |   | Deficit |   |   |   |   |
|                                                                                                            |   | Numberof shares                |      |   | Amount |   |   | Additionalpaid in capital |   |   | other comprehensive loss |   |   | accumulated during development stage |   |   | Total stockholders equity (deficit) |   |
|                                                                                                            |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of January 1, 2005                                                                                   |   |                           | 2,251,807 |   |   |   | 2,252 |   |   |   | 242,046 |   |   |   | (30,109 | ) |   |   | (701,816 | ) |   |   | (487,627 | ) |
| Loss for the year                                                                                               |   |                           | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (1,055,594 | ) |   |   | (1,055,594 | ) |
| Gain on translation of subsidiary's financial statements from its functional currency to the reporting currency |   |                           | -         |   |   |   | - |   |   |   | - |   |   |   | 8,542 |   |   |   | - |   |   |   | 8,542 |   |
| Comprehensive loss                                                                                              |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,047,052 | ) |
|                                                                                                            |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of 218,281 Common Stock for cash of US$ 1.72 per share on January 14, 2005                   |   |                           | 218,281   |   |   |   | 218 |   |   |   | 374,782 |   |   |   | - |   |   |   | - |   |   |   | 375,000 |   |
| Issuance of 291,051 Common Stock for cash of US$ 1.72 per share on April 5, 2005                           |   |                           | 291,051   |   |   |   | 291 |   |   |   | 499,709 |   |   |   | - |   |   |   | - |   |   |   | 500,000 |   |
| Issuance of 59,389 Common Stock for cash of US$ 3.37 per share on May 31, 2005                             |   |                           | 59,389    |   |   |   | 60 |   |   |   | 199,940 |   |   |   | - |   |   |   | - |   |   |   | 200,000 |   |
| Stock-based compensation                                                                                        |   |                           | 52,147    |   |   |   | 52 |   |   |   | 189,564 |   |   |   | - |   |   |   | - |   |   |   | 189,616 |   |
| Balance as of December 31, 2005                                                                                 |   |                           | 2,872,675 |   |   |   | 2,873 |   |   |   | 1,506,041 |   |   |   | (21,567 | ) |   |   | (1,757,410 | ) |   |   | (270,063 | ) |
|                                                                                                            |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss for the year                                                                                               |   |                           | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (1,282,842 | ) |   |   | (1,282,842 | ) |
| Loss on translation of subsidiary's financial statements from its functional currency to the reporting currency |   |                           | -         |   |   |   | - |   |   |   | - |   |   |   | (57,127 | ) |   |   | - |   |   |   | (57,127 | ) |
| Comprehensive loss                                                                                              |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,339,969 | ) |
|                                                                                                            |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of 87,315 Common Stock for cash of US$ 1.47 per share on January 26, 2006                    |   |                           | 87,315    |   |   |   | 87 |   |   |   | 128,118 |   |   |   | - |   |   |   | - |   |   |   | 128,205 |   |
| Issuance of 1,899 Common Stock for cash of US$ 3.63 per share on March 31, 2006                       |   |                           | 1,899     |   |   |   | 2 |   |   |   | 6,888 |   |   |   | - |   |   |   | - |   |   |   | 6,890 |   |
| Issuance of 13,786 Common Stock for cash of US$ 3.63 per share on June 16, 2006                       |   |                           | 13,786    |   |   |   | 14 |   |   |   | 49,986 |   |   |   | - |   |   |   | - |   |   |   | 50,000 |   |
| Issuance of 14,113 Common Stock for cash of US$ 3.63 per share on June 30, 2006                       |   |                           | 14,113    |   |   |   | 14 |   |   |   | 51,166 |   |   |   | - |   |   |   | - |   |   |   | 51,180 |   |
| Issuance of 51,207 Common Stock for cash of US$ 3.91 per share on August 15, 2006                     |   |                           | 51,207    |   |   |   | 51 |   |   |   | 199,949 |   |   |   | - |   |   |   | - |   |   |   | 200,000 |   |
| Issuance of 301,948 Common Stock for cash of US$ 4.31 per share on October 5, 2006                    |   |                           | 301,948   |   |   |   | 302 |   |   |   | 1,299,698 |   |   |   | - |   |   |   | - |   |   |   | 1,300,000 |   |
| Issuance of 348,402 Common Stock for cash of US$ 4.31 per share on December 14, 2006                  |   |                           | 348,402   |   |   |   | 349 |   |   |   | 1,372,146 |   |   |   | - |   |   |   | - |   |   |   | 1,372,495 |   |
| Stock-based compensation                                                                                        |   |                           | 63,395    |   |   |   | 63 |   |   |   | 277,434 |   |   |   | - |   |   |   | - |   |   |   | 277,497 |   |
| Balance as of December 31, 2006                                                                                 |   |                           | 3,754,740 |   |   |   | 3,755 |   |   |   | 4,891,426 |   |   |   | (78,694 | ) |   |   | (3,040,252 | ) |   |   | 1,776,235 |   |

| (*) | As described in Note 1A, the financial statements were retroactively restated to reflect the historical financial statements of the subsidiary A.D. Integrity Applications Ltd., which merged with a subsidiary of the Company on July 15, 2010, as part of a structural reorganization of the Group. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| The accompanying notes are an integral part of the consolidated financial statements. |
|---------------------------------------------------------------------------------------|

----

|                                                                                                            |   | US Dollars (except share data) |      |
|-----------------------------------------------------------------------------------------------------------------|--------|--------------------------------|-----------|
|                                                                                                            |   | Common Stock                   |      |   |   |   |   | Accumulated |   |   |   |   |   | Deficit |   |   |   |   |
|                                                                                                            |   | Numberof shares                |      |   | Amount |   |   | Additional paid in capital |   |   | other comprehensive income (loss) |   |   | Receivable in respect of stock issuance |   |   | accumulated during development stage |   |   | Total stockholdersequity (deficit) |   |
|                                                                                                            |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of January 1, 2007                                                                                   |   |                           | 3,754,740 |   |   |   | 3,755 |   |   |   | 4,891,426 |   |   |   | (78,694 | ) |   |   | - |   |   |   | (3,040,252 | ) |   |   | 1,776,235 |   |
| Loss for the year                                                                                               |   |                           | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (1,593,205 | ) |   |   | (1,593,205 | ) |
| Gain on translation of subsidiary's financial statements from its functional currency to the reporting currency |   |                           | -         |   |   |   | - |   |   |   | - |   |   |   | 84,528 |   |   |   | - |   |   |   | - |   |   |   | 84,528 |   |
| Comprehensive loss                                                                                              |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,508,677 | ) |
| Stock-based compensation                                                                                        |   |                           | 28,707    |   |   |   | 29 |   |   |   | 274,630 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 274,659 |   |
| Balance as of December 31, 2007                                                                                 |   |                           | 3,783,447 |   |   |   | 3,784 |   |   |   | 5,166,056 |   |   |   | 5,834 |   |   |   | - |   |   |   | (4,633,457 | ) |   |   | 542,217 |   |
|                                                                                                            |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss for the year                                                                                               |   |                           | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (1,528,981 | ) |   |   | (1,528,981 | ) |
| Gain on translation of subsidiary's financial statements from its functional currency to the reporting currency |   |                           | -         |   |   |   | - |   |   |   | - |   |   |   | 110,134 |   |   |   | - |   |   |   | - |   |   |   | 110,134 |   |
| Comprehensive loss                                                                                              |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,418,847 | ) |
|                                                                                                            |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of 61,989 Common Stock for cash of US$ 5.52 per share on September 27, 2008                  |   |                           | 61,989    |   |   |   | 62 |   |   |   | 341,938 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 342,000 |   |
| Issuance of 104,220 Common Stock for cash of US$ 5.52 per share on October 7, 2008                    |   |                           | 104,220   |   |   |   | 104 |   |   |   | 574,896 |   |   |   | - |   |   |   | (75,000 | ) |   |   | - |   |   |   | 500,000 |   |
| Stock-based compensation                                                                                        |   |                           | -         |   |   |   | - |   |   |   | 84,380 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 84,380 |   |
| Balance as of December 31, 2008                                                                                 |   |                           | 3,949,656 |   |   |   | 3,950 |   |   |   | 6,167,270 |   |   |   | 115,968 |   |   |   | (75,000 | ) |   |   | (6,162,438 | ) |   |   | 49,750 |   |

| (*) | As described in Note 1A, the financial statements were retroactively restated to reflect the historical financial statements of the subsidiary A.D. Integrity Applications Ltd., which merged with a subsidiary of the Company on July 15, 2010, as part of a structural reorganization of the Group. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| The accompanying notes are an integral part of the consolidated financial statements. |
|---------------------------------------------------------------------------------------|

----

|                                                                                                            |   | US Dollars (except share data) |      |
|-----------------------------------------------------------------------------------------------------------------|--------|--------------------------------|-----------|
|                                                                                                            |   | Common Stock                   |      |   |   |   |   | Accumulated |   |   |   |   |   | Deficit |   |   |   |   |
|                                                                                                            |   | Numberof shares                |      |   | Amount |   |   | Additional paid in capital |   |   | other comprehensive income (loss) |   |   | Receivable in respect of stock issuance |   |   | accumulated during development stage |   |   | Total stockholders equity (deficit) |   |
|                                                                                                            |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of January 1, 2009                                                                                   |   |                           | 3,949,656 |   |   |   | 3,950 |   |   |   | 6,167,270 |   |   |   | 115,968 |   |   |   | (75,000 | ) |   |   | (6,162,438 | ) |   |   | 49,750 |   |
| Loss for the year                                                                                               |   |                           | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (1,202,296 | ) |   |   | (1,202,296 | ) |
| Loss on translation of subsidiary's financial statements from its functional currency to the reporting currency |   |                           | -         |   |   |   | - |   |   |   | - |   |   |   | (13,367 | ) |   |   | - |   |   |   | - |   |   |   | (13,367 | ) |
| Comprehensive loss                                                                                              |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,215,663 | ) |
|                                                                                                            |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of 50,342 Common Stock for cash of US$ 6.02 per share in January 2009                             |   |                           | 50,342    |   |   |   | 50 |   |   |   | 302,950 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 303,000 |   |
| Repayment of receivable in respect of stock issuance                                                            |   |                           | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 75,000 |   |   |   | - |   |   |   | 75,000 |   |
| Stock-based compensation                                                                                        |   |                           | -         |   |   |   | - |   |   |   | 12,171 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 12,171 |   |
| Balance as of December 31, 2009                                                                                 |   |                           | 3,999,998 |   |   |   | 4,000 |   |   |   | 6,482,391 |   |   |   | 102,601 |   |   |   | - |   |   |   | (7,364,734 | ) |   |   | (775,742 | ) |
|                                                                                                            |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss for the year                                                                                               |   |                           | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (2,788,446 | ) |   |   | (2,788,446 | ) |
| Loss on translation of subsidiary's financial statements from its functional currency to the reporting currency |   |                           | -         |   |   |   | - |   |   |   | - |   |   |   | (119,019 | ) |   |   | - |   |   |   | - |   |   |   | (119,019 | ) |
| Comprehensive loss                                                                                              |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (2,907,465 | ) |
| Issuance of 530,600 Common Stock for cash of US$ 6.25 per share in December 2010, net of related expenses  |   |                           | 530,600   |   |   |   | 531 |   |   |   | 2,356,501 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 2,357,032 |   |
| Stock-based interest compensation to convertible notes holders                                                  |   |                           | 194,391   |   |   |   | 194 |   |   |   | 1,214,749 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,214,943 |   |
| Conversion of convertible notes                                                                                 |   |                           | 119,586   |   |   |   | 120 |   |   |   | 694,676 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 694,796 |   |
| Stock-based compensation                                                                                        |   |                           | -         |   |   |   | - |   |   |   | 14,575 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 14,575 |   |
| Balance as of December 31, 2010                                                                                 |   |                           | 4,844,575 |   |   |   | 4,845 |   |   |   | 10,762,892 |   |   |   | (16,418 | ) |   |   | - |   |   |   | (10,153,180 | ) |   |   | 598,139 |   |

| (*) | As described in Note 1A, the financial statements were retroactively restated to reflect the historical financial statements of the subsidiary A.D. Integrity Applications Ltd., which merged with a subsidiary of the Company on July 15, 2010, as part of a structural reorganization of the Group. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| The accompanying notes are an integral part of the consolidated financial statements. |
|---------------------------------------------------------------------------------------|

----

|                                                                                                                |   | US Dollars (except share data) |      |
|---------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|-----------|
|                                                                                                                |   | Common Stock                   |      |   |   |   |   | Accumulated |   |   |   |   |   | Deficit |   |   |   |   |
|                                                                                                                |   | Numberof shares                |      |   | Amount |   |   | Additional paid in capital |   |   | other comprehensive loss |   |   | Receivable in respect of stock issuance |   |   | accumulatedduring development stage |   |   | Total stockholders equity (deficit) |   |
|                                                                                                                |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of January 1, 2011                                                                                       |   |                           | 4,844,575 |   |   |   | 4,845 |   |   |   | 10,762,892 |   |   |   | (16,418 | ) |   |   | - |   |   |   | (10,153,180 | ) |   |   | 598,139 |   |
| Loss for the year                                                                                                   |   |                           | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (2,364,339 | ) |   |   | (2,364,339 | ) |
| Gain on translation of subsidiary's financial statements from its functional currency to the reporting currency     |   |                           | -         |   |   |   | - |   |   |   | - |   |   |   | 39,052 |   |   |   | - |   |   |   | - |   |   |   | 39,052 |   |
| Comprehensive loss                                                                                                  |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (2,325,287 | ) |
|                                                                                                                |   |                           |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance of 16,320 Common Stock for cash of US$ 6.25 per share in January 31, 2011, net of related expenses    |   |                           | 16,320    |   |   |   | 16 |   |   |   | 83,164 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 83,180 |   |
| Issuance of 90,768 Common Stock for cash of US$ 6.25 per share in March 31, 2011, net of related expenses |   |                           | 90,768    |   |   |   | 91 |   |   |   | 479,810 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 479,901 |   |
| Issuance of 40,000 Common Stock for cash of US$ 6.25 per share in April 29, 2011, net of related expenses      |   |                           | 40,000    |   |   |   | 40 |   |   |   | 191,682 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 191,722 |   |
| Issuance of 34,200 Common Stock for cash of US$ 6.25 per share in May 31, 2011, net of related expenses        |   |                           | 34,200    |   |   |   | 34 |   |   |   | 179,992 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 180,026 |   |
| Issuance of 269,680 Common Stock for cash of US$ 6.25 per share on July 29, 2011, net of related expenses      |   |                           | 269,680   |   |   |   | 270 |   |   |   | 1,466,115 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,466,385 |   |
| Fair value of warrants with down-round protection issued in connection with Common Stock issuances                  |   |                           | -         |   |   |   | - |   |   |   | (83,899 | ) |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (83,899 | ) |
| Stock-based compensation                                                                                            |   |                           | -         |   |   |   | - |   |   |   | 378,072 |   |   |   |   |   |   |   | - |   |   |   | - |   |   |   | 378,072 |   |
| Balance as of December 31, 2011                                                                                     |   |                           | 5,295,543 |   |   |   | 5,296 |   |   |   | 13,457,838 |   |   |   | 22,634 |   |   |   | - |   |   |   | (12,517,519 | ) |   |   | 968,239 |   |

| (*) | As described in Note 1A, the financial statements were retroactively restated to reflect the historical financial statements of the subsidiary A.D. Integrity Applications Ltd., which merged with a subsidiary of the Company on July 15, 2010, as part of a structural reorganization of the Group. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| The accompanying notes are an integral part of the consolidated financial statements. |
|---------------------------------------------------------------------------------------|

----

INTEGRITY 

|                                                                                   |   | US dollars (except share data) |       |
|----------------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                                   |   | Year ended December 31,        |       |   | Cumulative period from September 30, 2001 (date of inception) through December 31, |   |
|                                                                                   |   | 2011                           |       |   |   | 2010(*) |   |   |   | 2009(*) |   |   |   | 2011(*) |   |
| Cash flows from operating activities:                                                  |   |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss for the period                                                                    |   |                           | (2,364,339 | ) |   |   | (2,788,446 | ) |   |   | (1,202,296 | ) |   |   | (12,517,519 | ) |
| Adjustments to reconcile loss for the period to net cash used in operating activities: |   |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                                                           |   |                           | 23,045     |   |   |   | 19,153 |   |   |   | 20,837 |   |   |   | 132,486 |   |
| Increase in liability for employee rights upon retirement                              |   |                           | 1,127      |   |   |   | 16,284 |   |   |   | 34,485 |   |   |   | 223,702 |   |
| Stock-based compensation                                                               |   |                           | 378,072    |   |   |   | 14,575 |   |   |   | 12,171 |   |   |   | 1,230,903 |   |
| Stock-based interest compensation to convertible notes holders                         |   |                           | -          |   |   |   | 1,214,943 |   |   |   | - |   |   |   | 1,214,943 |   |
| Linkage difference on principal of loans from stockholders (**)                        |   |                           | 24,934     |   |   |   | 15,909 |   |   |   | 10,617 |   |   |   | 177,049 |   |
| Interest on convertible notes                                                          |   |                           | -          |   |   |   | 78,192 |   |   |   | - |   |   |   | 78,192 |   |
| Gain on sale of property and equipment                                                 |   |                           | -          |   |   |   | (912 | ) |   |   | - |   |   |   | (912 | ) |
| Gain from trading marketable securities                                                |   |                           | -          |   |   |   | - |   |   |   | (756 | ) |   |   | (12,920 | ) |
| Changes in assets and liabilities:                                                     |   |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Decrease (increase) in other current assets                                            |   |                           | (23,968    | ) |   |   | (46,562 | ) |   |   | 577 |   |   |   | (83,287 | ) |
| Increase (decrease) in accounts payable                                                |   |                           | 64,697     |   |   |   | (14,120 | ) |   |   | (8,530 | ) |   |   | 73,142 |   |
| Increase (decrease) in other current liabilities                                       |   |                           | (19,681    | ) |   |   | 123,147 |   |   |   | (29,835 | ) |   |   | 207,386 |   |
| Net cash used in operating activities                                                  |   |                           | (1,916,113 | ) |   |   | (1,367,837 | ) |   |   | (1,162,730 | ) |   |   | (9,276,835 | ) |
| Cash flows from investment activities:                                                 |   |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Decrease (increase) in funds in respect of employee rights upon retirement             |   |                           | 14,436     |   |   |   | (25,387 | ) |   |   | (28,819 | ) |   |   | (102,804 | ) |
| Purchase of property and equipment                                                     |   |                           | (54,619    | ) |   |   | (8,725 | ) |   |   | (5,007 | ) |   |   | (208,773 | ) |
| Proceeds from sale of property and equipment                                           |   |                           | -          |   |   |   | 4,791 |   |   |   | - |   |   |   | 4,791 |   |
| Investment in marketable securities                                                    |   |                           | -          |   |   |   | - |   |   |   | - |   |   |   | (388,732 | ) |
| Proceeds from sale of marketable securities                                            |   |                           | -          |   |   |   | - |   |   |   | 135,195 |   |   |   | 406,995 |   |
| Short-term loan granted to related party, net of repayments                            |   |                           | -          |   |   |   | - |   |   |   | 127,551 |   |   |   | (14,252 | ) |
| Net cash provided by (used in) investment activities                                   |   |                           | (40,183    | ) |   |   | (29,321 | ) |   |   | 228,920 |   |   |   | (302,775 | ) |
| Cash flows from financing activities                                                   |   |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Credit from banking institutions (repayment)                                           |   |                           | (18,669    | ) |   |   | (75,845 | ) |   |   | 88,265 |   |   |   | (6,218 | ) |
| Proceeds from issuance of convertible notes                                            |   |                           | -          |   |   |   | 1,144,000 |   |   |   | - |   |   |   | 1,144,000 |   |
| Repayment of convertible notes                                                         |   |                           | -          |   |   |   | (527,396 | ) |   |   | - |   |   |   | (527,396 | ) |
| Proceeds from issuance of Common Stock, net of issuance expenses                       |   |                           | 2,401,214  |   |   |   | 2,357,032 |   |   |   | 378,000 |   |   |   | 10,406,380 |   |
| Proceeds from stockholders loans                                                       |   |                           | -          |   |   |   | - |   |   |   | - |   |   |   | 347,742 |   |
| Net cash provided by financing activities                                              |   |                           | 2,382,545  |   |   |   | 2,897,791 |   |   |   | 466,265 |   |   |   | 11,364,508 |   |
| Effect of exchange rate changes on cash and cash equivalents                           |   |                           | (23,993    | ) |   |   | (68,417 | ) |   |   | 3,275 |   |   |   | 111,606 |   |
| Increase (decrease) in cash and cash equivalents                                       |   |                           | 402,256    |   |   |   | 1,432,216 |   |   |   | (464,270 | ) |   |   | 1,896,504 |   |
| Cash and cash equivalents at beginning of the period                                   |   |                           | 1,494,248  |   |   |   | 62,032 |   |   |   | 526,302 |   |   |   | - |   |
| Cash and cash equivalents at end of the period                                         |   |                           | 1,896,504  |   |   |   | 1,494,248 |   |   |   | 62,032 |   |   |   | 1,896,504 |   |

| Supplementary information on financing activities not involving cash flows:                                      |   |   |   |   |   |   |    |   |   |   |   |   |   |   |   |   |
|------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Conversion of convertible notes to Common Stock(see Note 10C)                                                    |   |   | -      |   |   |   | 694,796 |   |   |   | -      |   |   |   | -      |   |
| Fair value of warrants with down-round protection issued in connection with Common Stock issuances (See Note 9C) |   |   | 83,899 |   |   |   | -       |   |   |   | -      |   |   |   | -      |   |

| (*) | As described in Note 1A, the financial statements were retroactively restated to reflect the historical financial statements of the subsidiary A.D. Integrity Applications Ltd., which merged with a subsidiary of the Company on July 15, 2010, as part of a structural reorganization of the Group. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (**) | Represents charges taken to reflect changes in the Israeli Consumer Price index with respect to loans from stockholders that are denominated in New Israeli Shekels and linked to the Israeli Consumer Price Index. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

INTEGRITY 

| NOTE 1 | – | GENERAL |
|--------|---------|---------|

|   | A. | Integrity Applications, Inc. (the "Company") was incorporated on May 18, 2010, under the laws of the State of Delaware.  On July 15, 2010, Integrity Acquisition Corp. Ltd. (hereinafter: "Integrity Acquisition"), a wholly owned Israeli subsidiary of the Company which was established on May 23, 2010, completed a merger with A.D. Integrity Applications Ltd. (hereinafter: "Integrity Israel"), an Israeli corporation which was previously held by the stockholders of the Company.  Pursuant to the merger, all stockholders, option holders and warrant holders of Integrity Israel received an equal number of shares, options and warrants of the Company, as applicable, in exchange for their shares, options and/or warrants in Integrity Israel.  Following the merger, Integrity Israel remained a wholly-owned subsidiary of the Company.  As the merger transaction constituted a structural reorganization, the merger has been accounted for at historical cost in a manner similar to a pooling of interests.  On this basis, stockholders’ equity has been retroactively restated such that each ordinary share of Integrity Israel is reflected in stockholders' equity as a share of Common Stock of the Company as of the date of the issuance thereof by Integrity Israel.  In addition, the historical financial statements of the Company for all dates prior to May 18, 2010 have been retroactively restated to reflect the activities of Integrity Israel. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | Integrity Israel was incorporated in 2001 and commenced its operations in 2002.  Integrity Israel, a medical device company, focuses on the design, development and commercialization of non-invasive glucose monitoring devices for home use by persons suffering with diabetes. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | B. | Going concern uncertainty |
|--------|----|---------------------------|

----

| NOTE 1 | – | GENERAL (cont.) |
|--------|---------|-----------------|

|   | C. | Stock split |
|--------|----|-------------|

|   | D. | Risk factors |
|--------|----|--------------|

| NOTE 2 | – | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|--------|---------|--------------------------------------------|

|   | A. | Functional currency |
|--------|----|---------------------|

|                                              |   | Year ended December 31, |   |
|---------------------------------------------------|--------|-------------------------|--------|
|                                              |   | 2011                    |   |   | 2010 |   |   | 2009 |   |
| Official exchange rate of NIS 1 to US dollar |   |                    | 0.262  |   |   |   | 0.282 |   |   |   | 0.265 |   |

----

| NOTE 2 | – | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
|--------|---------|----------------------------------------------------|

|   | B. | Principles of consolidation |
|--------|----|-----------------------------|

|   | C. | Use of estimates in the preparation of financial statements |
|--------|----|-------------------------------------------------------------|

|   | D. | Cash and cash equivalents |
|--------|----|---------------------------|

|   | E. | Property and equipment, net |
|--------|----|-----------------------------|

|   | 1. | Property and equipment are stated at cost, net of accumulated depreciation.  Depreciation is calculated using the straight-line method over the estimated useful lives of the assets.  When an asset is retired or otherwise disposed of, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition is reflected in the statements of operations. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Rates of depreciation: |
|--------|----|------------------------|

|                           | %                                 |
|--------------------------------|-----------------------------------|
|                           |                              |
| Computers                      | 33                                |
| Furniture and office equipment | 7-15                              |
| Leasehold improvements         | Shorter of lease termand 10 years |

|   | F. | Impairment of long-lived assets |
|--------|----|---------------------------------|

|   |   | The Group's long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value.  The Group has not recorded any impairment losses in the reported periods. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| NOTE 2 | – | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
|--------|---------|----------------------------------------------------|

|   | G. | Deferred income taxes |
|--------|----|-----------------------|

|   | H. | Liability for employee rights upon retirement |
|--------|----|-----------------------------------------------|

|   |   | Integrity Israel's liability for employee rights upon retirement with respect to its Israeli employees is calculated, pursuant to Israeli severance pay law, based on the most recent salary of each employee multiplied by the number of years of employment, as of the balance sheet date. Employees are entitled to one month's salary for each year of employment, or a portion thereof. Integrity Israel makes monthly deposits to insurance policies and severance pay funds.  The liability of the Company is fully provided for. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn upon the fulfillment of Integrity Israel's severance obligations pursuant to Israeli severance pay laws or labor agreements with its employees.  The value of the deposited funds is based on the cash surrender value of these policies, and includes immaterial profits/losses. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | Severance expenses for the year ended December 31, 2011, 2010 and 2009 amounted to US$ 1,127, US$ 16,284 and US$ 34,485, respectively. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | I. | Research and development expenses |
|--------|----|-----------------------------------|

|   | J. | Royalty-bearing grants |
|--------|----|------------------------|

----

| NOTE 2 | – | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
|--------|---------|----------------------------------------------------|

|   | K. | Loss per share |
|--------|----|----------------|

|   | L. | Stock-based compensation |
|--------|----|--------------------------|

|   | M. | Other comprehensive income (loss) |
|--------|----|-----------------------------------|

|   | N. | Fair value of financial instruments |
|--------|----|-------------------------------------|

|   | O. | Convertible notes |
|--------|----|-------------------|

----

| NOTE 2 | – | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) |
|--------|---------|----------------------------------------------------|

|   | P. | Concentrations of credit risk |
|--------|----|-------------------------------|

|   | Q. | Contingencies |
|--------|----|---------------|

|   | R.  | Warrants with down-round protection |
|--------|----------|-------------------------------------|

|   | S. | Recently issued accounting pronouncements |
|--------|----|-------------------------------------------|

|   | 1. | ASC Topic 220, "Comprehensive Income" |
|--------|----|---------------------------------------|

|   | 2. | ASC Topic 210, “Balance Sheet” |
|--------|----|--------------------------------------------|

----

| NOTE 3 | – | OTHER CURRENT ASSETS |
|--------|---------|----------------------|

|                       |   | US dollars   |   |
|----------------------------|--------|--------------|--------|
|                       |   | December 31, |   |
|                       |   | 2011         |   |   | 2010 |   |
|                       |   |         |   |   |   |   |
| Related parties            |   |         | -      |   |   |   | 11,578 |   |
| Prepaid expenses           |   |         | 21,282 |   |   |   | 14,391 |   |
| Government Institution (*) |   |         | 70,346 |   |   |   | 53,363 |   |
| Other                      |   |         | 1,189  |   |   |   | 6,372 |   |
|                       |   |         | 92,817 |   |   |   | 85,704 |   |

|   | (*) | Represents amounts prepaid by Integrity Israel to the Israeli tax authorities or amounts owed to Integrity Israel by the Israeli Value Added Tax authorities. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

| NOTE 4 | – | PROPERTY AND EQUIPMENT, NET |
|--------|---------|-----------------------------|

|                                  |   | US dollars   |     |
|---------------------------------------|--------|--------------|----------|
|                                  |   | December 31, |     |
|                                  |   | 2011         |     |   | 2010 |   |
|                                  |   |         |     |   |   |   |
| Computers                             |   |         | 75,982   |   |   |   | 68,704 |   |
| Furniture and office equipment        |   |         | 108,485  |   |   |   | 74,879 |   |
| Leasehold improvements                |   |         | 23,401   |   |   |   | 25,195 |   |
|                                  |   |         | 207,868  |   |   |   | 168,778 |   |
| Less – accumulated depreciation |   |         | (125,000 | ) |   |   | (111,428 | ) |
|                                  |   |         | 82,868   |   |   |   | 57,350 |   |

| NOTE 5 | – | ACCOUNTS PAYABLE |
|--------|---------|------------------|

|           |   | US dollars   |   |
|----------------|--------|--------------|--------|
|           |   | December 31, |   |
|           |   | 2011         |   |   | 2010 |   |
|           |   |         |   |   |   |   |
| Open accounts  |   |         | 57,662 |   |   |   | 8,354 |   |
| Checks payable |   |         | 14,101 |   |   |   | 2,312 |   |
|           |   |         | 71,763 |   |   |   | 10,666 |   |

| NOTE 6 | – | OTHER CURRENT LIABILITIES |
|--------|---------|---------------------------|

|                               |   | US dollars   |    |
|------------------------------------|--------|--------------|---------|
|                               |   | December 31, |    |
|                               |   | 2011         |    |   | 2010 |   |
|                               |   |         |    |   |   |   |
| Related parties                    |   |         | -       |   |   |   | 50,133 |   |
| Employees and related institutions |   |         | 130,918 |   |   |   | 110,436 |   |
| Accrued expenses and other         |   |         | 80,360  |   |   |   | 98,017 |   |
|                               |   |         | 211,278 |   |   |   | 258,586 |   |

----

| NOTE 7 | – | LINE OF CREDIT |
|--------|---------|----------------|

| NOTE 8 | – | LONG-TERM LOANS FROM STOCKHOLDERS |
|--------|---------|-----------------------------------|

| NOTE 9 | – | COMMITMENTS AND CONTINGENT LIABILITIES |
|--------|---------|----------------------------------------|

|   | A. | On March 4, 2004, the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor of the State of Israel (the “OCS”) agreed to provide Integrity Israel with a grant of NIS 420,000, or approximately US$ 93,462, for its plan to develop a non-invasive blood glucose monitor (the “development plan”). This grant constituted 60% of Integrity Israel’s research and development budget for the development plan. Due to Integrity Israel’s acceptance of this grant, it is subject to the provisions of the Israeli Law for the Encouragement of Industrial Research and Development of 1984 (the “R&D Law”). Integrity Israel is required to pay royalties to the OCS on the proceeds from the sale of the Company's systems resulting from research and development projects for which the OCS provided a grant. The maximum royalties payable by Integrity Israeli will be an amount equal to US$93,462, plus interest from the date of grant at LIBOR. In the first 3 years of sales, Integrity Israel will be required to pay a 3% royalty on the sale of any product developed under the research and development projects. In the fourth, fifth and sixth years of sales, Integrity Israel will be required to pay a 4% royalty on sales of such products and from the seventh year onward Integrity Israel will be required to pay a 5% royalty. Integrity Israel was entitled to the grant only upon incurring research and development expenditures. There were no future performance obligations related to the grant received from the OCS. As of December 31, 2011, the contingent liabilities with respect to the grants received from the OCS subject to repayment under this royalty agreement on future sales equal an amount of US$ 93,462, not including interest. There is no expiration date with respect to Integrity Israel’s obligations to pay royalties to the OCS in respect of the above. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | B. | Integrity Israel currently leases approximately 3,100 sq. ft. of office space in the city of Ashkelon, Israel for its principal offices and prototype laboratory.  The lease term began on February 1, 2006 and was extended until January 31, 2009.  Pursuant to a verbal agreement with the landlord, Integrity Israel currently leases these facilities on a monthly basis at a cost of NIS 11,500 plus VAT per month (US$ 3,010). |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| NOTE 9 | – | COMMITMENTS AND CONTINGENT LIABILITIES (cont.) |
|--------|---------|------------------------------------------------|

|   | C. | In 2010, the Company engaged Andrew Garrett, Inc. as its exclusive placement agent (the "Placement Agent") in connection with an offering on a “best efforts” basis of a minimum 560,000 shares (US$ 3,500,000) of the Company's Common Stock and a maximum of 2,000,000 shares of the Company’s Common Stock (US$ 12,500,000) (the "Offerings").  Pursuant to a placement agent agreement with the Placement Agent, the Placement Agent (or its sub-agents) was entitled to receive, as a commission, an amount equal to 7% of the funds raised in the Offerings, such amounts to be paid in cash, plus 3% of the funds as a management fee plus a 3% non-accountable expense allowance (13% in the aggregate).  In addition, the placement agent agreement required the Company to issue to the Placement Agent (or its sub-agents) warrants to purchase up to 10% of the shares of Common Stock issued to investors (or underlying convertible securities issued to investors) in connection with the Offerings at a price per share that will be equal to the offering price.  The warrants to be issued to the Placement Agent include a limited Period (until September 1, 2012) Down-Round Protection under which the strike price of the warrants would be adjusted to a price per share at which the Company will subsequently issue stock, if such price per share is less than the original strike price of the warrants.  See also Note 2R. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | In connection with the Offerings described in Note 10, the Company paid to the Placement Agent US$ 366,412 and US$ 753,850, respectively, in cash during 2011 and 2010, respectively.  In addition, the Company issued to the Placement Agent warrants to purchase 45,097 and 83,281 shares, respectively, of the Company's Common Stock with an exercise price of US$ 6.25.  The warrants expire on the fifth anniversary of the date on which the shares of common stock underlying such warrants are fully registered with the SEC.  The warrants include customary adjustment provisions for stock splits, reorganizations and other similar transactions and provide for anti-dilution protection until September 1, 2012 for certain issuances of common stock by us for less than US$ 6.25 per share. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | D. | Y.H. Dimri Holdings, which was a shareholder of Integrity Israel prior to the reorganization and merger described in Note 1 ("Dimri"), has alleged (post the reorganization) that, in connection with such reorganization, certain of Dimri's rights in Integrity Israel were violated.  Under Dimri's investment agreement, certain rights in Integrity Israel were granted to Dimri, including an anti-dilution provision that provided that Dimri’s holdings in Integrity Israel would not be diluted below 18% of Integrity Israel’s issued capital shares as a result of any investment in Integrity Israel.  On the date of the reorganization, Dimri owned 18% of Integrity Israel’s ordinary shares and, therefore, upon the completion of the reorganization, Dimri was entitled to receive 18% of the shares of common stock of the Company outstanding on such date in exchange for his shares in Integrity Israel, subject to the fulfillment of certain requirements.  The Company's management, considering the legal advice of Israeli legal counsel, believe that, given Dimri no longer owns shares in Integrity Israel as a result of the reorganization, rights attached to the shares in Integrity Israel no longer exist in Integrity Israel and do not and have never existed in the Company.  However, Dimri has refused to acknowledge or agree to the termination of these rights and has challenged the Company's position. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| NOTE 9 | – | COMMITMENTS AND CONTINGENT LIABILITIES (cont.) |
|--------|---------|------------------------------------------------|

|   | D. | (cont.) |
|--------|----|---------|

| NOTE 10 | – | SHARE CAPITAL |
|---------|---------|---------------|

|   | A. | Description of the rights attached to the Shares in the Company |
|--------|----|-----------------------------------------------------------------|

|   | B. | Stock-based compensation |
|--------|----|--------------------------|

|   | 1. | Grants to non-employees |
|--------|----|-------------------------|

|   | a. | During 2005, Integrity Israel granted to three consultants an aggregate sum of 144,250 of its ordinary shares of NIS 0.01 par value as consideration for consulting services.  The compensation expense was recorded as an expense over the consulting service period (varying from 2 months to 2 years). The non-cash compensation recorded with respect to such grants was US$ 123,625, US$ 229,564 and US$ 175,516 for the years 2007, 2006 and 2005, respectively.  The fair value of the shares was based on the recent share price applicable. Following the merger with Integrity Israel, the shares were replaced with shares of common stock of the Company. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | In October 2006, the Company granted 45,531 options with an exercise price of US$ 4.305 per share in consideration of investor finders.  In November 2008, the Company granted 8,989 options with an exercise price of US$ 5.517 per share in consideration of investor finders.  The fair value of the grant was based on the most recent share price with respect to the relevant grant date. Following the merger with Integrity Israel, the options were replaced with options of the Company. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c. | See Note 9C. |
|--------|----|--------------|

----

| NOTE 10 | – | SHARE CAPITAL (cont.) |
|---------|---------|-----------------------|

|   | B. | Stock-based compensation (cont.) |
|--------|----|----------------------------------|

|   | 2.  | Grants to employees |
|--------|----------|---------------------|

|   | a. | During 2005-2006, Integrity Israel granted to two individuals (an officer and a director), options exercisable into 24,394 options of NIS 0.01 par value of Integrity Israel.  The exercise price of each option was US$ 3.49 (with respect to 4,486 options) and US$ 3.84 (with respect to 19,908 options).  The vesting period was three years with respect to the 4,486 options and two months with respect to the 19,908 options. The total non-cash compensation recorded with respect to such grants was US$ 45,291, US$ 2,435 and US$ 203 for the years 2007, 2006 and 2005, respectively.  The fair value of the grants, which was estimated using Black-Scholes option pricing model, was based, among other factors, on the most recent share price with respect to the relevant grant date. Following the merger with Integrity Israel, the options were replaced with options of the Company. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | In August 2007, Integrity Israel’s Board of Directors ("Integrity Israel's Board") approved a stock option plan ("Integrity Israel's plan") for the grant, without consideration of options exercisable into ordinary shares of NIS 0.01 par value of Integrity Israel to employees, officers and directors of Integrity Israel.  The exercise price and vesting period for each grantee of options was determined by Integrity Israel's Board and specified in such grantee's option agreement.  The options were to vest over a period of 1-12 quarters based on each grantee's option agreements.  Any option not exercised within 10 years after the date of grant thereof will expire. In July 2010, following the merger with Integrity Israel, the Company adopted the 2010 Share Incentive Plan (the "2010 Share Incentive Plan"), pursuant to which the Company's Board of Directors is authorized to grant options exercisable into Common Stock of the Company.  The Company has reserved 529,555 shares of Common Stock for issuance under the plan.  The purpose of the 2010 Share Incentive Plan is to offer an incentive to employees, directors, officers, consultants, advisors, suppliers and any other person or entity whose services are considered valuable to the Company, as well as to replace the Integrity Israel Plan and to replace all options granted in the past by Integrity Israel. Upon the adoption of the 2010 Share Incentive Plan, all options granted under the Integrity Israel's Plan were replaced by options subject to the 2010 Share Incentive Plan on a 1 for 1 basis. As of December 31, 2011, 91,829 options have been granted to employees and 21,641 options to non-employees (excluding the options granted to related parties – see Notes 16A and 16B).  All options granted in the Integrity Israel Plan were replaced with options of the Company and are subject to the 2010 Share Incentive Plan.  The non-cash compensation relating to options granted to employees and directors was US$ 320, US$ 14,575 and US$ 12,171 during the years ended December 31, 2011, 2010 and 2009, respectively. As of December 31, 2011, there are 185,343 shares available for future grants under the 2010 Share Incentive Plan. As of December 31, 2011, there were approximately $327,663 of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the grants. This amount, which relate to the grants described in Note 16 A and B, is expected to be recognized in 2012. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| NOTE 10 | – | SHARE CAPITAL (cont.) |
|---------|---------|-----------------------|

|   | B. | Stock-based compensation (cont.) |
|--------|----|----------------------------------|

|   | 2.  | Grants to employees (cont.) |
|--------|----------|-----------------------------|

|                                       |   | Number |    |   | Weighted average exercise price (US$) |   |
|--------------------------------------------|--------|--------|---------|--------|---------------------------------------|--------|
| Year ended December 31, 2011               |   |   |    |   |                                  |   |
| Balance outstanding at beginning of year   |   |   | 428,367 |   |                                  |   | 5.37 |   |
| Granted (*)                                |   |   | 29,315  |   |                                  |   | 6.25 |   |
| Exercised                                  |   |   | -       |   |                                  |   | - |   |
| Forfeited                                  |   |   | (3,328  | )      |                                  |   | 3.84 |   |
| Balance outstanding at end of the year     |   |   | 454,354 |   |                                  |   | 5.44 |   |
| Balance exercisable at the end of the year |   |   | 110,142 |   |                                  |   | 2.81 |   |

|   | (*) | Represents the minimum number of options, as of the date indicated that was required to be issued to Messrs. Gal and Malka following the completion of the Offering, the number of which was finalized in August 2011 upon the completion of the Offering. See Note 16 for a discussion regarding the total number of options to be issued in connection with the Offering. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                       |   | Number |    |   | Weighted average exercise price (US$) |   |
|--------------------------------------------|--------|--------|---------|--------|---------------------------------------|--------|
| Year ended December 31, 2010               |   |   |    |   |                                  |   |
| Balance outstanding at beginning of year   |   |   | 109,197 |   |                                  |   | 2.81 |   |
| Granted (*)                                |   |   | 314,897 |   |                                  |   | 6.25 |   |
| Granted                                    |   |   | 4,273   |   |                                  |   | 6.02 |   |
| Exercised                                  |   |   | -       |   |                                  |   | - |   |
| Forfeited                                  |   |   | -       |   |                                  |   | - |   |
| Balance outstanding at end of the year     |   |   | 428,367 |   |                                  |   | 5.37 |   |
| Balance exercisable at the end of the year |   |   | 109,197 |   |                                  |   | 2.81 |   |

|   | (*) | Represents the minimum number of options, as of the date indicated, that was required to be issued to Messrs. Gal and Malka following the completion of the Offering, the number of which was finalized in August 2011 upon the completion of the Offering. See Note 16 for a discussion regarding the total number of options to be issued in connection with the Offering. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| NOTE 10 | – | SHARE CAPITAL (cont.) |
|---------|---------|-----------------------|

|   | B. | Stock-based compensation (cont.) |
|--------|----|----------------------------------|

|                                       |   | Number |    |   | Weighted average exercise price (US$) |   |
|--------------------------------------------|--------|--------|---------|--------|---------------------------------------|--------|
| Year ended December 31, 2009               |   |   |    |   |                                  |   |
| Balance outstanding at beginning of year   |   |   | 106,213 |   |                                  |   | 2.73 |   |
| Granted                                    |   |   | 2,984   |   |                                  |   | 5.52 |   |
| Exercised                                  |   |   | -       |   |                                  |   | - |   |
| Forfeited                                  |   |   | -       |   |                                  |   | - |   |
| Balance outstanding at end of the year     |   |   | 109,197 |   |                                  |   | 2.81 |   |
| Balance exercisable at the end of the year |   |   | 106,213 |   |                                  |   | 2.73 |   |

| Exerciseprices |   | Outstanding at December 31, 2011 |    |   | Weighted average remaining contractual life years |   |   | Weighted average exercise price |   |   | Exercisable at December 31, 2011 |   |   | Weighted average exercise price |    |
|----------------|--------|---------------------------------------|---------|--------|---------------------------------------------------|--------|--------|---------------------------------|--------|--------|---------------------------------------|--------|--------|--------------------------------------|---------|
| US$            |   |                                  |    |   |                                              |   |   |                            |   |   |                                  |   |   |                                 |    |
|           |   |                                  |    |   |                                              |   |   |                            |   |   |                                  |   |   |                                 |    |
| 1.72           |   |                                  | 46,004  |   |                                              |   | 5.6    |                            |   |   | 1.72                                  |   |   |                                 | 46,004  |   |   |   | 1.72 |   |
| 3.27           |   |                                  | 30,966  |   |                                              |   | 3.9    |                            |   |   | 3.27                                  |   |   |                                 | 30,966  |   |   |   | 3.27 |   |
| 3.48           |   |                                  | 4,486   |   |                                              |   | 3.9    |                            |   |   | 3.48                                  |   |   |                                 | 4,486   |   |   |   | 3.48 |   |
| 3.63           |   |                                  | 4,849   |   |                                              |   | 5.6    |                            |   |   | 3.63                                  |   |   |                                 | 4,849   |   |   |   | 3.63 |   |
| 3.84           |   |                                  | 16,580  |   |                                              |   | 5.0    |                            |   |   | 3.84                                  |   |   |                                 | 16,580  |   |   |   | 3.84 |   |
| 5.52           |   |                                  | 2,984   |   |                                              |   | 7.6    |                            |   |   | 5.52                                  |   |   |                                 | 2,984   |   |   |   | 5.52 |   |
| 6.02           |   |                                  | 4,273   |   |                                              |   | 5.1    |                            |   |   | 6.02                                  |   |   |                                 | 4,273   |   |   |   | 6.02 |   |
| 6.25           |   |                                  | 344,212 | (*)    |                                              |   | 9.0    |                            |   |   | -                                     |   |   |                                 | -       |   |   |   | - |   |
|           |   |                                  | 454,354 |   |                                              |   |   |                            |   |   |                                  |   |   |                                 | 110,142 |   |   |   |   |   |

|   | (*) | Represents the minimum number of options, as of the date indicated, to be issued to Messrs. Gal and Malka following the completion of the Offering, the number of which was finalized in August 2011 upon the completion of the Offering. See Note 16 for a discussion regarding the total number of options to be issued in connection with the Offering. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| NOTE 10 | – | SHARE CAPITAL (cont.) |
|---------|---------|-----------------------|

|   | B. | Stock-based compensation (cont.) |
|--------|----|----------------------------------|

| Exerciseprices |   | Outstanding at December 31, 2010 |    |   | Weighted average remaining contractual life years |   |   | Weighted average exercise price |   |   | Exercisable at December 31, 2010 |   |   | Weighted average exercise price |    |
|----------------|--------|---------------------------------------|---------|--------|---------------------------------------------------|--------|--------|---------------------------------|--------|--------|---------------------------------------|--------|--------|---------------------------------|---------|
| US$            |   |                                  |    |   |                                              |   |   |                            |   |   |                                  |   |   |                            |    |
|           |   |                                  |    |   |                                              |   |   |                            |   |   |                                  |   |   |                            |    |
| 1.72           |   |                                  | 46,004  |   |                                              |   | 6.6    |                            |   |   | 1.72                                  |   |   |                            | 46,004  |   |   |   | 1.72 |   |
| 3.27           |   |                                  | 30,966  |   |                                              |   | 4.9    |                            |   |   | 3.27                                  |   |   |                            | 30,966  |   |   |   | 3.27 |   |
| 3.48           |   |                                  | 4,486   |   |                                              |   | 4.9    |                            |   |   | 3.48                                  |   |   |                            | 4,486   |   |   |   | 3.48 |   |
| 3.63           |   |                                  | 4,849   |   |                                              |   | 6.6    |                            |   |   | 3.63                                  |   |   |                            | 4,849   |   |   |   | 3.63 |   |
| 3.84           |   |                                  | 19,908  |   |                                              |   | 6.0    |                            |   |   | 3.84                                  |   |   |                            | 19,908  |   |   |   | 3.84 |   |
| 5.52           |   |                                  | 2,984   |   |                                              |   | 8.6    |                            |   |   | 5.52                                  |   |   |                            | 1,493   |   |   |   | 5.52 |   |
| 6.02           |   |                                  | 4,273   |   |                                              |   | 6.12   |                            |   |   | 6.02                                  |   |   |                            | 1,491   |   |   |   | 6.02 |   |
| 6.25           |   |                                  | 314,897 | (*)    |                                              |   | 10.0   |                            |   |   | -                                     |   |   |                            | -       |   |   |   | - |   |
|           |   |                                  | 428,367 |   |                                              |   |   |                            |   |   |                                  |   |   |                            | 109,197 |   |   |   |   |   |

|   | (*) | Represents the minimum number of options, as of the date indicated, to be issued to Messrs. Gal and Malka following the completion of the Offering, the number of which was finalized in August 2011 upon the completion of the Offering. See Note 16 for a discussion regarding the total number of options to be issued in connection with the Offering. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                  |   | 2011   |   |   | 2010   |   |      | 2009   |   |
|---------------------------------------|--------|--------|--------|--------|--------|--------|-----------|--------|--------|
| Dividend yield (%)                    |   |   | 0      |   |   |   | 0         |   |   |   | 0 |   |
| Expected volatility (%) (*)           |   |   | 50     |   |   |   | 50        |   |   |   | 50 |   |
| Risk free interest rate (%)           |   |   | 2      |   |   |   | 2         |   |   |   | 2 |   |
| Expected term of options (years) (**) |   |   | 5-6    |   |   |   | 5-6       |   |   |   | 5-6 |   |
| Exercise price (US dollars)           |   |   | 6.25   |   |   |   | 6.02/6.25 |   |   |   | 5.52 |   |
| Share price (US dollars) (***)        |   |   | 6.25   |   |   |   | 6.02/6.25 |   |   |   | 5.52 |   |
| Fair value (US dollars)               |   |   | 3.08   |   |   |   | 2.81/3.08 |   |   |   | 1.42 |   |

|   | (*) | Due to the fact that the Company is a nonpublic entity, the expected volatility is based on the historic volatility of public companies which operate in the same industry sector. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (**) | Due to the fact that the Company does not have historical exercise data, the expected term was determined based on the "simplified method" in accordance with Staff Accounting Bulletin No. 110. |
|--------|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (***) | The fair value of the share was based on the most recent share prices, as applicable to each grant. |
|--------|-------|-----------------------------------------------------------------------------------------------------|

----

| NOTE 10 | – | SHARE CAPITAL (cont.) |
|---------|---------|-----------------------|

|   | C. | Convertible notes |
|--------|----|-------------------|

|   | 1. | In April 2010, the Company issued Secured Notes (“Senior Notes”) in the aggregate initial principal amount of US$ 999,000 together with rights to acquire Common Stock following the reorganization and merger described in Note 1.  The principal amount of the notes, together with any interest accrued but unpaid thereon, and any fees and charges, are referred to collectively as the “Outstanding Amount” of such Senior Notes. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (i) | If the Senior Note Purchaser elected, to be repaid under its Senior Note in shares of Common Stock in lieu of any cash, such Senior Note Purchaser received the number of shares of Common Stock equal to the quotient obtained by dividing (i) 200% of the unpaid portion of the Outstanding Amount of such Senior Note Purchaser’s Senior Note by (ii) the offering price per share of the Common Stock, rounded to the nearest whole share; or |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (ii) | If the Senior Note Purchaser did not make the election in clause (i) above, such Senior Note Purchaser instead received the number of shares of Common Stock equal to the quotient obtained by dividing (i) 100% of the unpaid portion of the Outstanding Amount of such Senior Note Purchaser’s Senior Note by (ii) the offering price per share of the Common Stock, rounded to the nearest whole share, in addition to a cash payment equal to the Outstanding Amount of such Senior Note Purchaser’s Senior Note pursuant to the terms thereof. |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| NOTE 10 | – | SHARE CAPITAL (cont.) |
|---------|---------|-----------------------|

|   | C. | Convertible notes (cont.) |
|--------|----|---------------------------|

|   | 1. | (cont.) |
|--------|----|---------|

|   | 2. | In November 2010, Integrity Israel issued Unsecured Junior Promissory Notes ("Junior Notes") in the aggregate initial principal amount of US$ 170,000 (of which US$ 25,000 was received in 2011).  The Junior Promissory Notes were substantially similar to the Senior Notes, except that immediately after the initial closing of the Offering, each holder of Junior Promissory Notes was entitled to receive the number of shares of Common Stock equal to the quotient obtained by dividing (i) 200% of the Outstanding Amount of such holder’s Junior Promissory Note by (ii) the price per share of the Common Stock in the Offering, rounded to the nearest whole share.  The entitlement to receive a fixed value of Common Stock sold at the closing of the Offering in an amount equal to 200% of the original amount of the Junior Notes was recognized as an obligation to issue a variable number of shares under the provisions of ASC Topic 480, "Distinguishing Liabilities for Equity", accordingly an amount equal to 100% of the original amount of the Junior Notes was recognized as stock-based interest compensation (which was included among financing expenses, net) over the term of the Junior Notes (November 2010 – December 2010). On December 16, 2010, the Company completed an initial closing of the Offering, at which, 54,792 shares of Common Stock were issued to the purchasers of the Junior Promissory Notes pursuant to the terms and in full repayment of such Junior Promissory Notes.  The fair value of the shares (US$ 345,100) represents 200% of the original amount of the Senior Notes and interest accumulated up to the Offering date. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | D. | On December 16, 2010, the Company completed an initial closing of the Offering at which the Company received an amount of US$ 3,016,250 for 482,600 shares of Common Stock issued to investors in the Offering representing a price per share of US$ 6.25.  The Company issued to the Placement Agent, warrants to purchase an aggregate of 48,260 shares of Common Stock at the third closing with an exercise price of US$ 6.25 and in addition was required to pay US$ 392,112 in cash (see Note 9C). |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | E. | On December 30, 2010, the Company completed a second closing of the Offering at which the Company received an amount of US$ 300,000 for 48,000 shares of Common Stock issued to investors in the Offering representing a price per share of US$ 6.25.  The Company issued to the Placement Agent, warrants to purchase an aggregate of 4,800 shares of Common Stock at the third closing with an exercise price of US$ 6.25 and in addition was required to pay US$ 39,000 in cash (see Note 9C). |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | F. | On January 31, 2011, the Company completed a third closing of the Offering at which the Company received an amount of US$ 102,000 for 16,320 shares of Common Stock issued to investors in the Offering representing a price per share of US$ 6.25.  The Company issued to the Placement Agent, warrants to purchase an aggregate of 1,632 shares of Common Stock at the third closing with an exercise price of US$ 6.25 and in addition was required to pay US$ 13,260 in cash (see Note 9C). |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| NOTE 10 | – | SHARE CAPITAL (cont.) |
|---------|---------|-----------------------|

|   | G. | On March 31, 2011, the Company completed a fourth closing of the Offering at which the Company received an amount of US$ 567,300 for 90,768 shares of Common Stock issued to investors in the Offering representing a price per share of US$ 6.25.  The Company issued to the Placement Agent, warrants to purchase an aggregate of 9,077 shares of Common Stock at the fourth closing with an exercise price of US$ 6.25 and in addition was required to pay US$ 73,749 in cash (see Note 9C). |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | H. | On April 29, 2011, the Company completed a fifth closing of the Offering at which the Company received an amount of US$ 250,000 for 40,000 shares of common stock issued to investors in the Offering representing a price per share of US$ 6.25.  The Company issued to the Placement Agent, warrants to purchase an aggregate of 4,000 shares of common-stock at the fifth closing with an exercise price of US$ 6.25 and in addition was required to pay US$ 32,500 in cash (see Note 9C). |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | I. | On May 31, 2011, the Company completed a sixth closing of the Offering at which the Company received an amount of US$ 213,750 for 34,200 shares of common stock issued to investors in the Offering representing a price per share of US$ 6.25.  The Company issued to the Placement Agent, warrants to purchase an aggregate of 3,420 shares of common-stock at the sixth closing with an exercise price of US$ 6.25 and in addition was required to pay US$ 27,788 in cash (see Note 9C). |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | J. | On July 29, 2011, the Company completed a seventh closing of the Offering at which the Company received an amount of US$ 1,685,500 for 269,680 shares of Common Stock.  The Company issued to the Placement Agent, warrants to purchase an aggregate of 26,968 shares of common-stock at the seventh closing with an exercise price of US$ 6.25 and in addition was required to pay US$ 219,115 in cash (see Note 9C). |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | K. | Purchasers of the common stock in the Offering are entitled to anti-dilution protection until September 1, 2012 for certain issuances of common stock by the Company for less than US$ 6.25 per share. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| NOTE 11 | – | RESEARCH AND DEVELOPMENT EXPENSES, NET |
|---------|---------|----------------------------------------|

|                          |   | US dollars              |      |
|-------------------------------|--------|-------------------------|-----------|
|                          |   | Year ended December 31, |      |   | Cumulative period from September 30, 2001 (date of inception) through December 31, |   |
|                          |   | 2011                    |      |   | 2010 |   |   | 2009 |   |   | 2011 |   |
| Salaries and related expenses |   |                    | 1,194,170 |   |   |   | 557,042 |   |   |   | 482,662 |   |   |   | 4,847,022 |   |
| Professional fees             |   |                    | 210,674   |   |   |   | 94,711 |   |   |   | 205,903 |   |   |   | 1,442,753 |   |
| Materials                     |   |                    | 60,360    |   |   |   | 19,114 |   |   |   | 56,791 |   |   |   | 479,715 |   |
| Depreciation                  |   |                    | 22,835    |   |   |   | 53,219 |   |   |   | 44,948 |   |   |   | 225,675 |   |
| Travel expenses               |   |                    | 119,498   |   |   |   | 58,215 |   |   |   | 25,195 |   |   |   | 344,067 |   |
| Vehicle maintenance           |   |                    | 33,856    |   |   |   | 33,697 |   |   |   | 30,411 |   |   |   | 241,420 |   |
| Other                         |   |                    | 147,908   |   |   |   | 118,058 |   |   |   | 159,198 |   |   |   | 1,068,524 |   |
|                          |   |                    | 1,789,301 |   |   |   | 934,056 |   |   |   | 1,005,108 |   |   |   | 8,649,176 |   |
| Less:Grants from the OCS (*)  |   |                    | -         |   |   |   | - |   |   |   | - |   |   |   | (93,462 | ) |
|                          |   |                    | 1,789,301 |   |   |   | 934,056 |   |   |   | 1,005,108 |   |   |   | 8,555,714 |   |

|   | (*)  | See Note 9A. |
|--------|-----------|--------------|

----

| NOTE 12 | – | GENERAL AND ADMINISTRATIVE EXPENSES |
|---------|---------|-------------------------------------|

|                          |   | US dollars              |    |
|-------------------------------|--------|-------------------------|---------|
|                          |   | Year ended December 31, |    |   | Cumulative period from September 30, 2001 (date of inception) through December 31 |   |
|                          |   | 2011                    |    |   | 2010 |   |   | 2009 |   |   | 2011 |   |
|                          |   |                    |    |   |   |   |   |   |   |   |   |   |
| Salaries and related expenses |   |                    | 162,221 |   |   |   | 55,995 |   |   |   | 55,131 |   |   |   | 430,756 |   |
| Professional fees             |   |                    | 336,308 |   |   |   | 365,398 |   |   |   | 52,270 |   |   |   | 1,491,023 |   |
| Other                         |   |                    | 45,616  |   |   |   | 36,102 |   |   |   | 57,755 |   |   |   | 239,955 |   |
|                          |   |                    | 544,145 |   |   |   | 457,495 |   |   |   | 165,156 |   |   |   | 2,161,734 |   |

| NOTE 13 | – | FINANCING EXPENSES, NET |
|---------|---------|-------------------------|

|                                                                             |   | US dollars              |   |
|----------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                             |   | Year ended December 31, |   |   | Cumulative period from September 30, 2001 (date of inception) through December 31 |   |
|                                                                             |   | 2011                    |   |   | 2010 |   |   | 2009 |   |   | 2011 |   |
|                                                                             |   |                    |   |   |   |   |   |   |   |   |   |   |
| Linkage difference on principal of loans from stockholders                       |   |                    | 24,934 |   |   |   | 15,909 |   |   |   | 10,617 |   |   |   | 177,049 |   |
| Exchange rate differences                                                        |   |                    | (4,638 | ) |   |   | (51,844 | ) |   |   | 18,210 |   |   |   | 233,897 |   |
| Stock-based interest compensation to holders of convertible notes (see Note 10C) |   |                    | -      |   |   |   | 1,214,943 |   |   |   | - |   |   |   | 1,214,943 |   |
| Interest expenses on credit from banks and other                                 |   |                    | 10,597 |   |   |   | 17,987 |   |   |   | 3,205 |   |   |   | (25,718 | ) |
| Interest expenses and other, related to convertible notes                        |   |                    | -      |   |   |   | 200,812 |   |   |   | - |   |   |   | 200,812 |   |
|                                                                             |   |                    | 30,893 |   |   |   | 1,397,807 |   |   |   | 32,032 |   |   |   | 1,800,983 |   |

| NOTE 14 | – | INCOME TAX |
|---------|---------|------------|

|   | A. | Measurement of results for tax purposes under the Israeli Income Tax (Inflationary Adjustments) Law, 1985 (the “Inflationary Adjustment Law”) Until December 31, 2007, Integrity Israel reported for tax purposes in accordance with the provisions of the Inflationary Adjustments Law, whereby taxable income was measured in NIS, adjusted for changes in the Israeli Consumer Price Index. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| NOTE 14 | – | INCOME TAX (cont.) |
|---------|---------|--------------------|

|   | B. | Reduction in Israeli corporate tax rates |
|--------|----|------------------------------------------|

|   | C. | Tax assessments |
|--------|----|-----------------|

|   | D. | Carryforward tax losses |
|--------|----|-------------------------|

|   | E. | The following is a reconciliation between the theoretical tax on pre-tax income, at the tax rate applicable to the Company (federal tax rate) and the tax expense reported in the financial statements: |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                               |   | US dollars              |       |
|------------------------------------------------------------------------------------|--------|-------------------------|------------|
|                                                                               |   | Year ended December 31, |       |
|                                                                               |   | 2011                    |       |   | 2010 |   |   | 2009 |   |
|                                                                               |   |                    |       |   |   |   |   |   |   |
| Pretax loss                                                                        |   |                    | (2,364,339 | ) |   |   | (2,788,446 | ) |   |   | (1,202,296 | ) |
| Federal tax rate                                                                   |   |                    | 35         | % |   |   | 35 | % |   |   | 35 | % |
| Income tax benefit computed at the ordinary tax rate                               |   |                    | (827,519   | ) |   |   | (975,956 | ) |   |   | (420,804 | ) |
| Non-deductible expenses                                                            |   |                    | 4,885      |   |   |   | 4,688 |   |   |   | 4,463 |   |
| Stock-based compensation                                                           |   |                    | 132,325    |   |   |   | 5,101 |   |   |   | 4,260 |   |
| Stock-based interest compensation to holders of convertible notes                  |   |                    | -          |   |   |   | 425,229 |   |   |   | - |   |
| Tax in respect of differences in corporate tax rates                               |   |                    | 236,434    |   |   |   | 278,844 |   |   |   | 252,483 |   |
| Losses and timing differences in respect of which no deferred taxes were generated |   |                    | 453,875    |   |   |   | 262,094 |   |   |   | 159,598 |   |
|                                                                               |   |                    | -          |   |   |   | - |   |   |   | - |   |

----

| NOTE 14 | – | INCOME TAX (cont.) |
|---------|---------|--------------------|

|   | F. | Deferred taxes result principally from temporary differences in the recognition of certain revenue and expense items for financial and income tax reporting purposes.  Significant components of the Group's future tax assets are as follows: |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                      |   | US dollars   |       |
|-------------------------------------------|--------|--------------|------------|
|                                      |   | December 31, |       |
|                                      |   | 2011         |       |   | 2010 |   |   | 2009 |   |
|                                      |   |         |       |   |   |   |   |   |   |
| Composition of deferred tax assets:       |   |         |       |   |   |   |   |   |   |
| Provision for employee-related obligation |   |         | 42,137     |   |   |   | 36,568 |   |   |   | 37,561 |   |
| Non-capital loss carry forwards           |   |         | 2,890,426  |   |   |   | 2,393,919 |   |   |   | 1,768,416 |   |
| Valuation allowance                       |   |         | (2,932,563 | ) |   |   | (2,430,487 | ) |   |   | (1,805,977 | ) |
|                                      |   |         | -          |   |   |   | - |   |   |   | - |   |

| NOTE 15 | – | LOSS PER SHARE |
|---------|---------|----------------|

|              |   | US dollars              |      |
|-------------------|--------|-------------------------|-----------|
|              |   | Year ended December 31, |      |
|              |   | 2011                    |      |   | 2010 |   |   | 2009 |   |
|              |   |                    |      |   |   |   |   |   |   |
| Loss for the year |   |                    | 2,364,339 |   |   |   | 2,788,446 |   |   |   | 1,202,296 |   |

|                                                                                                                                                      |   | Number of shares        |      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-----------|
|                                                                                                                                                      |   | Year ended December 31, |      |
|                                                                                                                                                      |   | 2011                    |      |   | 2010 |   |   | 2009 |   |
|                                                                                                                                                      |   |                    |      |   |   |   |   |   |   |
| Weighted average number of shares used in the computation of basic and diluted earnings per share                                                         |   |                    | 5,091,330 |   |   |   | 4,034,706 |   |   |   | 3,995,805 |   |
|                                                                                                                                                      |   |                    |      |   |   |   |   |   |   |   |   |   |
| Total weighted average number of ordinary shares related to outstanding options and warrants excluded from the calculations of diluted loss per share (*) |   |                    | 582,732   |   |   |   | 511,648 |   |   |   | 109,197 |   |

|   | (*) | All stock issuable upon the exercise of all outstanding stock options and warrants and conversion of convertible notes (with respect to fiscal year 2010 calculation of EPS) have been excluded from the calculation of the diluted net loss per share for all the reported periods, since the effect of the shares issuable with respect of these instruments was anti-dilutive. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| NOTE 16 | – | RELATED PARTIES |
|---------|---------|-----------------|

|   | A. | Avner Gal, the owner of approximately 7.75% of the Company's outstanding Common Stock entered into an employment agreement with Integrity Israel in July 2010 pursuant to which Mr. Gal agreed to continue to serve as the chief executive officer and managing director of Integrity Israel.  The agreement was approved by the board of directors and stockholders of Integrity Israel. Mr. Gal’s employment agreement provides for an annual salary of NIS 480,000 (US$ 125,622) and an annual bonus to be determined by the Board of Directors and an additional sum provided that Mr. Gal reaches certain milestones approved by the Board, as well as the payment of certain social and insurance benefits and the use of a group four car.  The agreement also provides for a renegotiation of Mr. Gal’s annual salary on the one-year anniversary thereof and the renegotiation of Mr. Gal’s bonus formula once Integrity Israel has begun commercialization of its products.  The agreement is terminable by either party on 180 days notice, immediately by Integrity Israel with the payment of an amount equal to 180 days of annual salary, or immediately by Integrity Israel for cause (as defined in the agreement) without the payment of severance.  Mr. Gal is subject to a non-compete and a confidentiality agreement during the term of the agreement and for one year thereafter. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | In connection with the Offering, Mr. Gal was entitled to receive options to purchase 5% of all issued and outstanding Common Stock of the Company after the offering for sale of a minimum 560,000 shares ($3,500,000) of the Company's Common Stock and a maximum of 2,000,000 shares of the Company's Common Stock ($12,500,000).  The Offering (which commenced in December 2010) was completed in July 2011 and, as a result, Mr. Gal became entitled to receive a grant of 264,778 options.  The options shall be deemed vested, in 3 equal parts, in accordance with the achievement of the following milestones: (i) submission of clinical trials’ results to the Notified Body; (ii) CE mark approval; (iii) FDA approval. The options will be exercisable at $6.25 per share. In the event of a merger and/or acquisition in which one or more of the abovementioned milestones have not yet been met, the options shall be deemed vested on the date of the merger and/or acquisition.  All options granted as described above are subject to the terms of the 2010 share incentive plan. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | B. | David Malka, the owner of 3.5% of the Company's outstanding Common Stock entered into an employment agreement with Integrity Israel in July 2010 pursuant to which Mr. Malka agreed to continue to serve as the vice president of operations of Integrity Israel.  The agreement was approved by the board of directors and stockholders of Integrity Israel. Mr. Malka’s employment agreement provides for an annual salary of NIS 240,000 (US$ 62,811) and an annual bonus to be determined by the Board of Directors in its sole discretion and an additional sum provided that Mr. Malka reaches certain milestones approved by the Board, as well as the payment of certain social and insurance benefits and the use of a group three car.  The agreement also provided for a renegotiation of Mr. Malka’s annual salary on the one-year anniversary thereof and the renegotiation of Mr. Malka’s bonus formula once Integrity Israel has begun commercialization of its products.  The agreement is terminable by either party on 90 days notice, immediately by Integrity Israel with the payment of an amount equal to 90 days of annual salary, or immediately by Integrity Israel for cause (as defined in the agreement) without the payment of severance.  Mr. Malka is subject to a non-compete and confidentiality agreement during the term of the agreement and for one year thereafter. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| NOTE 16 | – | RELATED PARTIES (cont.) |
|---------|---------|-------------------------|

|   | B. | (cont.) |
|--------|----|---------|

|   |   | In connection with the Offering, Mr. Malka was entitled to receive options to purchase 1.5% of all issued and outstanding Common Stock of the Company after the offering for sale of a minimum 560,000 shares ($3,500,000) of the Company's Common Stock and a maximum of 2,000,000 shares of the Company's common stock ($12,500,000).  The Offering (which commenced in December 2010) was completed in July 2011 and, as a result, Mr. Malka became entitled to receive a grant of 79,434 options.  The options shall be deemed vested, in equal parts, in accordance with the achievement of the following milestones: (i) Submission of clinical trials’ results to the Notified Body; (ii) CE mark approval; (iii) FDA approval. The options will be exercisable at $6.25 per share. In the event of a merger and/or acquisition in which one or more of the abovementioned milestones have not yet been met, the options shall be deemed vested on the date of the merger and/or acquisition.  All options granted as described above are subject to the terms of the 2010 share incentive plan. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | C. | Zicon Ltd., a company of which Zvi Cohen, a director of the Company and an owner of 6.83% of the Company's outstanding Common Stock, was a principal stockholder, officer and director, has manufactured certain PC boards for Integrity Israel during the years 2006-2010.  In the years 2008-2010, total compensation paid by the Company to Zicon has been less than US$ 20,000, each year. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | D. | See Notes 3, 6 and 8. |
|--------|----|-----------------------|

| NOTE 17 | – | SUBSEQUENT EVENTS |
|---------|---------|-------------------|

|   | A. | On March 12, 2012, the Company granted to Company’s employees options to purchase 17,500 shares of the Company’s common stock at an exercise price of US$6.25 per share. All options were granted in accordance with and subject to the terms of the Company’s 2010 Incentive Compensation Plan. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | B. | See Note 9D. |
|--------|----|--------------|

----

| ExhibitNumber |   | Description                                                                                                                                                                                             |
|---------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1           |   | Merger Agreement and Plan of Reorganization, dated as of May 25, 2010, by and among Integrity Applications, Inc., Integrity Acquisition Ltd. and A.D. Integrity Applications Ltd. (1)                   |
| 3.1           |   | Certificate of Incorporation of Integrity Applications, Inc. (1)                                                                                                                                        |
| 3.2           |   | Certificate of Amendment to Certificate of Incorporation of Integrity Applications, Inc. (1)                                                                                                            |
| 3.3           |   | Bylaws of Integrity Applications, Inc. (1)                                                                                                                                                              |
| 4.1           |   | Specimen Certificate Evidencing Shares of Common Stock (1)                                                                                                                                              |
| 4.2           |   | Form of Common Stock Purchase Warrant (1)                                                                                                                                                               |
| 10.1*         |   | Integrity Applications, Inc. 2010 Incentive Compensation Plan (1)                                                                                                                                       |
| 10.2          |   | Form of Subscription Agreement between Integrity Applications, Inc. and the investor signatory thereto (1)                                                                                              |
| 10.3          |   | Registration Rights Agreement, dated December 16, 2010, by and among Integrity Applications, Inc., Andrew Garrett, Inc. and each investor signatory thereto (1)                                         |
| 10.4*         |   | Form of Director and Officer Indemnification Agreement (1)                                                                                                                                              |
| 10.5          |   | Exclusive Placement Agent Agreement, dated as of September 1, 2009, by and between Andrew Garrett, Inc. and A.D. Integrity Applications Ltd. (1)                                                        |
| 10.6          |   | Amendment No. 1 to Exclusive Placement Agent Agreement, effective as of December 16th, 2010, by and between Andrew Garrett, Inc., Integrity Applications, Inc. and A.D. Integrity Applications Ltd. (1) |
| 10.7*         |   | Personal Employment Agreement, dated as of July 22, 2009, between A.D. Integrity Applications Ltd. and Avner Gal (1)                                                                                    |
| 10.8*         |   | Personal Employment Agreement, dated as of July 22, 2010, between A.D. Integrity Applications Ltd. and David Malka (1)                                                                                  |
| 10.9*         |   | Letter Agreement, dated November 10, 2010, by and among Integrity Applications Inc., Integrity Applications Ltd. and Xplanit Ltd. (1)                                                                   |
| 10.10         |   | Irrevocable Undertaking of Indemnification, dated as of July 26, 2010, by and among Integrity Applications, Inc., Avner Gal, Zvi Cohen, Ilana Freger, David Malka and Alexander Raykhman (1)            |

----

| 10.11   |   | Investment Agreement, dated February 18, 2003, between A.D. Integrity Applications Ltd., Avner Gal, Zvi Cohen, David Freger and David Malka and Yigal Dimri (1)                |
|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12   |   | Agreement, dated as of November 1, 2005 by and between A.D. Integrity Applications Ltd. and Diabeasy Diabeasy cc. (3)                                                          |
| 10.13   |   | Agreement, dated as of October 2, 2005, by and between Technology Transfer Group and Integrity Applications Ltd. (1)                                                           |
| 10.14*  |   | Form of Stock Option Agreement (1)                                                                                                                                             |
| 10.15*  |   | Form of Stock Option Agreement (ESOP) (1)                                                                                                                                      |
| 10.16   |   | Letter of Approval, addressed to Integrity Applications Ltd. from the Ministry of Industry, Trade and Employment of the State of Israel (4)                                    |
| 10.17   |   | Letter of Undertaking, addressed to the Ministry of Industry, Trade and Employment of the State of Israel - Office of the Chief Scientist from Integrity Applications Ltd. (2) |
| 10.18   |   | Investment Agreement, dated March 16, 2004, by and among A.D. Integrity Applications Ltd., Yitzhak Fisher, Asher Kugler and Nir Tarlovsky. (3)                                 |
| 10.19*  |   | Personal Employment Agreement, dated as of December 6, 2011, between A.D. Integrity Applications Ltd. and Jacob Bar-Shalom. (6)                                                |
| 21.1    |   | Subsidiaries of Integrity Applications, Inc. (1)                                                                                                                               |
| 31.1    |   | Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002          |
| 31.2    |   | Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002          |
| 32.1    |   | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002                              |
| 32.2    |   | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002                              |
| 101.INS |   | XBRL Instance Document (5)                                                                                                                                                     |
| 101.SCH |   | XBRL Schema Document (5)                                                                                                                                                       |
| 101.CAL |   | XBRL Calculation Linkbase Document (5)                                                                                                                                         |
| 101.LAB |   | XBRL Label Linkbase Document (5)                                                                                                                                               |
| 101.PRE |   | XBRL Presentation Linkbase Document (5)                                                                                                                                        |
| 101.DEF |   | XBRL Definition Linkbase Document (5)                                                                                                                                          |

| (1) | Previously filed as an exhibit to the Company’s Registration Statement on Form S-1, as filed with the SEC on August 22, 2011. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Previously filed as an exhibit to Amendment No. 1 to the Company’s Registration Statement on Form S-1, as filed with the SEC on October 7, 2011. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Previously filed as an exhibit to Amendment No. 2 to the Company’s Registration Statement on Form S-1, as filed with the SEC on October 27, 2011. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Previously filed as an exhibit to Amendment No. 3 to the Company’s Registration Statement on Form S-1, as filed with the SEC on November 10, 2011. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | Filed as an exhibit to the Original Filing pursuant to Rule 405(a)(2)(ii) of Regulation S-T.  Pursuant to Rule 406T of Regulation S-T, the interactive files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6) | Filed as Exhibit 10.19 to the Original Filing. |
|-----|------------------------------------------------|

| * | Compensation Plan or Arrangement or Management Contract |
|---|---------------------------------------------------------|

----

|   | INTEGRITY APPLICATIONS, INC. |                        |
|--------|------------------------------|-----------------------------|
|   |                         |                        |   |
|   | By:                          | /s/ Avner Gal               |   |
|   | Name:                        | Avner Gal                   |   |
|   | Title:                       | Chairman of the Board       |   |
|   |                         | and Chief Executive Officer |   |

----

----